AZZ (AZZ) Q2 2026: Metal Coatings Margins Hold Above 30% Despite Mixed Precoat Volumes

2025-10-09 | By EarningsIQ Research

AZZ delivered a resilient Q2 as its core metal coatings segment maintained margin strength above 30%, offsetting softness in precote volumes tied to construction and tariff headwinds. Strategic share gains from import tariffs and a disciplined capital allocation approach underpin management’s confidence in guidance, with infrastructure tailwinds and the Washington facility ramp providing incremental upside into fiscal 2026.

Summary

• Margin Stability in Core Coatings: Metal coatings segment sustained 30%+ margins, shielding consolidated results from precote volatility.
• Tariffs and Share Gains: Import tariffs fueled new customer wins in precote, partially offsetting end-market softness.
• Infrastructure Tailwind: Ongoing federal project funding and aluminum packaging shifts support multi-year demand visibility.

Performance Analysis

AZZ’s Q2 results highlight the company’s operational discipline and strategic market positioning, with total sales increasing modestly and adjusted EPS up double digits year over year. The metal coatings segment, which now represents the largest and most profitable business line, delivered 10.9% sales growth and held margins above 30%, even as mix shifted toward lower-margin solar and transmission projects. This margin resilience is central to the company’s ability to absorb volatility elsewhere in the portfolio.

Precote metals, which provides coil coating services for construction, HVAC, appliances, and aluminum packaging, saw a 4.3% sales decline as building-related demand softened and tariff-driven uncertainty delayed customer projects. However, precote captured 3–4% market share from reduced pre-painted metal imports, partially offsetting the 9–10% market contraction. The Washington, Missouri facility ramped to 20% capacity, with management expecting significant incremental margin and volume contribution in the back half.

• Operational Efficiency: SG&A fell to 7.9% of sales, reflecting cost discipline and improved leverage.
• Balance Sheet Strength: Net leverage ratio improved to 1.7x, down from 2.7x, as cash flow and debt paydown continued.
• Capital Deployment: $19.3M in capex and $30.1M for the Canton galvanizing facility acquisition signal ongoing reinvestment in growth assets.

Interest expense dropped sharply following debt repricing and a new receivables securitization facility, freeing up capital for dividends and buybacks. The Canton acquisition is expected to be margin accretive, with immediate integration onto AZZ’s digital operations systems.

Executive Commentary

Strategic Positioning

1. Metal Coatings Margin Leadership

AZZ’s core galvanizing business, which protects steel from corrosion for infrastructure and utilities, continues to anchor profitability. Management affirmed a 30–32% EBITDA margin target, with only minor downside risk from zinc price volatility. The segment’s variable cost structure and rapid integration of new assets (e.g., Canton, Ohio) drive both resilience and scalability.

2. Tariff-Driven Share Gains and Import Displacement

Precote’s market share gains stem from U.S. tariffs on imported pre-painted metals, which have redirected business to domestic suppliers like AZZ. Management estimates a 3–4% share pickup, positioning AZZ to benefit further if tariffs persist. However, this offset is partial, as overall market demand remains weak outside infrastructure and aluminum packaging.

3. Infrastructure and Energy Transition Tailwind

Federal infrastructure funding (IIJA) and the shift to aluminum packaging provide multi-year demand visibility, especially for utility, solar, and data center projects. With 73% of IIJA funds now committed, AZZ expects continued order strength in non-building and civil works, while residential and commercial construction lag.

4. Washington, Missouri Facility Ramp

The new aluminum coil coating facility is a strategic growth lever, currently at 20% capacity and expected to reach 50%+ in Q3–Q4. This ramp will drive incremental margin and volume, particularly in the high-growth aluminum container market. Management is confident that fixed cost absorption and process optimization will turn the facility margin-positive in the second half.

5. Capital Allocation and M&A Pipeline

AZZ remains disciplined in capital deployment, balancing organic investments, bolt-on galvanizing acquisitions, and shareholder returns. The M&A pipeline is active, with nine opportunities in various stages, but management stresses quality and integration fit over pace. Share buybacks are underway, with a $20M program expected to complete within months.

Key Considerations

This quarter’s results reflect a business in transition, balancing cyclical headwinds in construction with secular tailwinds in infrastructure and packaging. Investors should focus on the following:

• Margin Durability in Metal Coatings: Sustained 30%+ margins provide a buffer against end-market volatility elsewhere.
• Tariff Impact Is Double-Edged: While AZZ is gaining share from import displacement, tariffs also depress overall demand and create project uncertainty.
• Facility Ramp Is a Key Earnings Lever: Washington, Missouri’s utilization trajectory will materially affect H2 contribution and FY26 run-rate.
• Debt Reduction and Interest Savings: Lower leverage and interest expense create incremental room for capital returns and M&A.
• Guidance Assumes No Avail Equity Income: The exit from electrical products (Avail JV) removes a previous earnings tailwind, requiring core operations to fill the gap.

Risks

AZZ faces several material risks, including continued softness in non-infrastructure construction, tariff-driven demand volatility, and potential zinc price inflation as inventory cycles turn. The ramp at Washington, Missouri could disappoint if aluminum packaging demand falters or operational challenges arise. Additionally, the lack of Avail equity income removes a cushion, amplifying sensitivity to core segment execution.

Forward Outlook

For Q3 and Q4, AZZ guided to:

• Continued margin strength in metal coatings, with volume upside from infrastructure projects.
• Washington, Missouri ramping toward 50%+ capacity, turning margin-positive in Q4.

For full-year 2026, management reiterated guidance:

• Sales of $1.625B–$1.725B
• Adjusted EBITDA in the lower half of $360M–$400M
• Adjusted EPS of $5.75–$6.25 (10–20% YoY growth)

Management cited multi-year infrastructure tailwinds, disciplined capital allocation, and a healthy M&A pipeline as key supports for guidance, while cautioning that construction markets remain choppy and tariff uncertainty persists.

• Infrastructure project backlog supports H2 volume.
• Interest expense expected to decline further as debt is paid down.

Takeaways

AZZ’s Q2 demonstrates the stabilizing power of its core metal coatings franchise, with tariff-driven share gains and infrastructure demand offsetting cyclical headwinds in precote. The Washington facility ramp and capital discipline are set to drive incremental upside as the company navigates a mixed macro environment.

• Metal Coatings Is the Earnings Anchor: 30%+ margins and infrastructure exposure insulate consolidated results from end-market volatility in other segments.
• Precote Share Gains Are Real but Not Sufficient Alone: Import tariffs help, but construction softness and tariff-driven uncertainty still weigh on volumes.
• Watch Washington Ramp and M&A Execution: Facility utilization and bolt-on integration will be key to delivering on guidance and sustaining growth into FY26–27.

Conclusion

AZZ’s Q2 results reinforce its position as a margin leader in metal coatings, with tariff-driven share gains and infrastructure tailwinds providing visibility despite pockets of end-market weakness. The company’s disciplined capital allocation and operational execution set the stage for continued growth as Washington ramps and new M&A is pursued.

Industry Read-Through

AZZ’s results offer several signals for the broader steel, coatings, and infrastructure sectors. Tariff volatility is reshaping supply chains, with domestic players capturing share but also facing demand uncertainty. Federal infrastructure funding is a powerful multi-year tailwind for suppliers tied to energy, utilities, and civil works, while residential and commercial construction remain laggards. The shift to aluminum packaging is accelerating, benefitting coil coaters and galvanizers with the right capacity and customer relationships. Investors should monitor facility ramp trajectories and margin sustainability as leading indicators for the sector’s health.

AZZ Industrials Metal Fabrication Infrastructure Tariffs Galvanizing Aluminum Packaging Capital Allocation